The following questions dealing with receivables are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.
1. Bad debt expense must be estimated in order to satisfy the matching principle when expenses are recorded in the same periods as the related revenues. In estimating bad debt expense for a period, companies generally accrue
a. Either an amount based on a percentage of total sales or an amount based on a percentage of accounts receivable after adjusting for any balance in the allowance for doubtful accounts.
b. A percentage of total sales.
c. Either an amount based on a percentage of credit sales or an amount based on a percentage of accounts receivable after adjusting for any balance in the allowance for doubtful accounts.
d. An amount equal to last year's bad debt expense.
Questions 2 and 3 are based on the following information:Madison Corporation uses the allowance method to value its accounts receivable and is making the annual adjustments at fiscal year-end, November 30. The proportion of uncollectible accounts is estimated based on past experience, which indicates 1.5% of net credit sales will be uncollectible. Total sales for the year were $2,000,000, of which $200,000 were cash transactions. Madison has determined that the Norris Corporation accounts receivable balance of $10,000 is uncollectible and will write off this account before year-end adjustments are made. Listed below are Madison's account balances at November 30 prior to any adjustments and the $10,000 write-off.
Sales ............ $2,000,000
Accounts receivable ....... $750,000
Sales discounts ........ $125,000
Allowance for doubtful accounts . $16,500
Sales returns and allowances .... $175,000
Bad debt expense ........... 0
2. The entry to write off Norris Corporation's accounts receivable balance of $10,000 will
a. Increase total assets and decrease net income.
b. Decrease total assets and net income.
c. Have no effect on total assets and decrease net income.
d. Have no effect on total assets and net income.
3. As a result of the November 30 adjusting entry to provide for bad debts, the allowance for doubtful accounts will
a. Increase by $30,000.
b. Increase by $25,500.
c. Increase by $22,500.
d. Decrease by $22,500.